Mullan v Norby Pty Ltd, in the matter of Norby Pty Ltd

RELEVANT FACTS 4 Norby was incorporated to develop and then ultimately market and sell a language learning robot that assists people to improve their pronunciation and speaking skills in over 20 languages (Norby Robot). 5 Mullan deposes that Norby now requires third-party investment in order to finalise development of the Norby Robot technology and bring the product to market. Trofimichine however disputes Norby's readiness to seek third party investment. 6 Mullan deposes to concern that any delay in Norby attracting third-party investment may cause irreparable damage to Norby by being second or late to the market and investors who may have been prepared to invest in Norby may no longer be prepared to do so because Norby will have lost a first mover advantage. 7 The Norby Robot consists of software in the form of a source code that is stored on the GitHub computer programming website (Norby Software), as well as hardware components, being three robot prototypes (Prototypes). Access to the Norby Software is necessary to enable further development of Norby's technology. 8 Norby only has two directors: Mullan and Trofimichine. Both were appointed as directors at the time of incorporation. Mullan holds 50% of the issued share capital in Norby through a corporate entity (Hobbit House Developments Pty Ltd), while Trofimichine holds the other 50% jointly with his wife. 9 Mullan is currently employed as the Chief Executive Officer of Norby. Trofimichine was employed by Norby as its Chief Technology Officer. There remains an open controversy between Mullan and Trofimichine as to whether Trofimichine remains an employee of Norby or whether he resigned from his position or was validly terminated. What appears to be clear in any case is that as part of his role as Chief Technology Officer, Trofimichine managed and programmed the Norby Software and had custody and control of the software, largely to the exclusion of Mullan. 10 Mullan deposes that on 30 June 2023, Mullan told Trofimichine that Norby could no longer afford to keep employing him until third-party funding was obtained and that on 14 July 2023, Trofimichine announced his resignation from Norby. Trofimichine denies that he informed Mullan that he was resigning from Norby. 11 The main complaint by Mullan is that despite no longer being an employee of Norby, and despite demand from Norby, Trofimichine retains sole access to the Norby Software and Trofimichine has failed or refused to provide Norby with access to the software. Additionally, Mullan alleges that Trofimichine has taken steps to disable the software, which means that Norby cannot demonstrate the Norby Robot to potential investors. The consequence is that Norby has no hope of attracting third-party investment for so long as it cannot access its own software. 12 Mullan has other complaints against Trofimichine as well, alleging that: (a) on 7 August 2023 after Mullan disabled his electronic key, Trofimichine broke into Norby's office and took a computer away with him that belonged to Norby (the Norby Computer). Trofimichine asserts that he retrieved the Norby Computer to complete work on the computer for Norby that was previously work that had been undertaken by a former employee of Norby. Trofimichine also asserts that he remained authorised to enter the office given his status as a director, and that such authorisation could not be unilaterally revoked by Mullan; (b) Trofimichine has failed to delivery to Norby two of three Prototypes which he had possession of by reason of his prior role as Chief Technology Officer (the Retained Prototypes); and (c) Trofimichine transferred money from Norby's bank account with ANZ for his own use and benefit.

RELEVANT LEGISLATION AND PRINCIPLES 13 Section 236(1) of the Act provides that a person may bring proceedings on behalf of a company if the person is, among other things, an officer of the company and the person is acting with leave granted under s 237 of the Act. 14 Section 237 of the Act then commences as follows: Applying for and granting leave (1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings. (2) The Court must grant the application if it is satisfied that: (a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and (b) the applicant is acting in good faith; and (c) it is in the best interests of the company that the applicant be granted leave; and (d) if the applicant is applying for leave to bring proceedings - there is a serious question to be tried; and (e) either: (i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or (ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied. 15 Section 237(3) and (4) go on to provide that a rebuttable presumption that granting leave is not in the best interests of the company arises if it is established, among other things, that the proceedings are by the company against a third party. Trofimichine is a director of Norby and is therefore not a third party. The rebuttable presumption that granting leave is not in the best interests of the company therefore does not arise. 16 When considering the operation of s 237 of the Act, the following observations are relevant: (a) Leave to bring proceedings on behalf of a company can only be obtained if the Court is satisfied of all five matters set out in s 237(2). If the Court is satisfied of all five matters, it must grant leave and it has no discretion to refuse leave. If the Court is not satisfied of any one of the requirements in s 237(2), then it should refuse leave: Pentridge Village Pty Ltd (In Liq) v Capital Finance Australia Ltd (2018) 58 VR 1; [2018] VSC 633 at [168] (Connock J) (Pentridge); App Shop Pty Ltd v Jalal Bros Pty Ltd [2019] NSWSC 490 at [13] (Black J) (App Shop); Redenbach v Legal Practice Management Group Pty Ltd (2018) 125 ACSR 513; [2018] NSWSC 527 at [51] (Black J) (Redenbach). (b) The applicant for leave bears the onus of establishing each of the requirements of s 237(2) on the balance of probabilities: Pentridge at [167]; App Shop at [13]. (c) Leave under s 237 must not be given lightly. The Court should be conscious that the grant of leave results in a company being compelled to engage in litigation as a plaintiff against its will or at least against the will of its controllers: Redenbach at [52]. (d) Factual circumstances relevant to the satisfaction (or otherwise) of one of the requirements in s 237(2) of the Act may also be relevant to the satisfaction (or otherwise) of the other requirements in s 237(2) of the Act. Overlap between considerations relevant to different criteria is common: Pentridge at [201].

SUBMISSIONS OF THE INTERVENER 17 Trofimichine does not dispute the legal principles and authorities relevant to the determination of the applications as identified in Mullan's written submissions, and as outlined above. 18 The issue for the Court is therefore whether, on the evidentiary material before it, the Court should grant the relief sought by Mullan. In summary, Trofimichine contends that the Court should not grant the relief sought by Mullan for the following reasons: (a) The proposed action to be brought by Norby is misconceived in that: (i) Norby is already in possession of the property it seeks to recover on the basis that the relevant property has always been, with Mullan's consent, in the custody and control of Trofimichine on behalf of Norby, and given that Trofimichine remains a duly appointed director of Norby, the property remains in the possession of Norby; (ii) Norby is indebted to Trofimichine in the amount claimed by Norby; (iii) Norby had an obligation to pay Trofimichine amounts equal to or exceeding the amounts Norby proposes to recover from Trofimichine, which Trofimichine asserts he is entitled to counterclaim for; (iv) Norby has consented to Trofimichine being authorised to operate the Norby bank account independently of Mullan; (v) of the payments said to have been made to Trofimichine from ANZ's bank account, only two were made to him with the remainder made to third parties for valuable consideration for Norby's purposes. (b) Properly understood, the facts set out in Mullan's affidavits disclose that Norby's board is in deadlock and Mullan's stated purpose for the proposed action (as distinct from the relief) is not a position that has the approval, consent or ratification of Norby's board. (c) Trofimichine submits that for the Court to grant the relief sought by Mullan would be for the Court to countenance what Trofimichine submits is unequivocally a sustained, systematic and unashamed course of oppressive conduct by Mullan against Trofimichine.

Consideration 19 I am satisfied for the following reasons that each of the criteria in s 237 of the Act are satisfied in relation to the Proposed Pleading against Trofimichine.

Entitlement to apply for leave - s 237(1) 20 Mullan is an officer of Norby, meaning he is entitled to make the application for leave under s 237.

Probable that company will not itself bring the proceedings - s 237(2)(a) 21 I am satisfied that it is probable that Norby will not itself bring the proceedings. Norby only has two directors, one of whom is Trofimichine. Norby is therefore deadlocked on the question of whether it should bring legal proceedings against Trofimichine.

Applicant is acting in good faith - s 237(2)(b) 22 The requirement that the applicant be acting in good faith has at least two elements: (a) the applicant must honestly believe that the company has a good claim with reasonable prospects of success; and (b) the claim must not be brought for some collateral purpose as would amount to an abuse of process: Re Gladstone Pacific Nickel Ltd (2011) 86 ACSR 432; [2011] NSWSC 1235 at [58] (Ball J) (Re Gladstone). 23 I am satisfied that Mullan is acting in good faith. Mullan has deposed to his belief that Norby has a good claim against Trofimichine with reasonable prospects of success. I am satisfied that Mullan is not bringing the claim for a collateral purpose; unless the relief in the proposed pleadings is obtained, Norby cannot undertake the work that needs to be done in order to try and attract third-party investment, and cannot showcase the Norby Robot to potential investors. Mullan deposes to obtaining the relief sought as "a matter of survival for Norby".

Best interests of Norby that leave be granted - s 237(2)(c) 24 The rebuttable presumption in s 237(3) does not arise in this case because Trofimichine is not a third party. 25 The Court is required to consider a range of factors when deciding whether it is in the best interests of the company that the applicant be granted leave, including: (a) the prospects of success of the action; (b) the likely recovery if the action is successful; (c) the likely costs of running the action and consequences if it is not successful; (d) the impact of the action on the resources and other aspect of the business of the company; and (e) the potential availability of some other remedy: Re Gladstone at [57]; Pentridge, at [256]; App Shop at [17]. 26 Taking each of these factors in turn, I am satisfied that it is in the best interests of Norby that leave be granted on the basis that: (a) Norby has a not insubstantial prospect of success. The evidence discloses, on a prima facie basis, that Trofimichine has taken the Norby Software, the Norby Computer and the Retained Prototypes which are the property of the company and has failed or refused to return the property despite demand. This remains the case despite Trofimichine's submissions that Norby retains current possession of the property by way of his position as a director of the company. Mr Watson-Jones, solicitor for Trofimichine, conceded during oral submissions that Mullan was entitled to possession of the Norby Software, just as Trofimichine was, and that Trofimichine was using his possession of the Norby Software as leverage against Mullan (although Mr Watson-Jones retained that the leverage was being used to prevent Trofimichine's exclusion from the company's management). These were proper concessions. (b) Given the above, I am satisfied that there is a not insubstantial likelihood that Trofimichine would be required to deliver up the Norby Software, Retained Prototypes and Norby Computer which Mullan has deposed is vital to Norby's future viability. (c) In relation to the likely costs and the consequences if the action is not successful, Mullan has agreed to give an undertaking to fund the proceedings and meet any adverse costs orders and that he will not seek any indemnity against Norby. I will require Mullan to give such undertakings as a condition of granting the relief sought. (d) The impact of the action on the resources of Norby is not a relevant consideration in this case because if access to the Norby Software, Retained Prototypes and the Norby Computer is not secured, Norby will not be in a position to be able to attempt to obtain third-party funding so as to take the Norby Robot to market. (e) I am satisfied that there is no other suitable remedy available to Norby in the circumstances.

Serious question to be tried - s 237(2)(d) 27 I am satisfied on the state of the evidence that there is a serious question to be tried in respect of the causes of action identified in the Proposed Pleading, namely whether: (a) Trofimichine has converted the Norby Software to his own use and has wrongfully deprived Norby of the software; (b) Trofimichine has converted the Norby Computer to his own use and has wrongfully deprived Norby of the computer; (c) Trofimichine has converted the Retained Prototypes to his own use and has wrongfully deprived Norby of the prototypes; (d) Trofimichine, in his capacity as a director of Norby, breached his duty to exercise his powers in good faith and in the best interests of Norby and not for an improper purpose by failing to provide Norby access to the Norby Software; (e) Trofimichine has improperly used his position to the detriment of Norby by refusing to share the login credentials to access the Norby Software with Norby; (f) Trofimichine has withdrawn sums of money from the bank account of Norby in breach of his duty to exercise his powers in good faith and in the best interests of Norby, or whether such withdrawals constitute an improper use of Trofimichine's position.

Written notice of the intention to apply for leave and the reasons for doing so - s 237(2)(e) 28 I am satisfied that at all relevant times, Norby has had notice of the application because Mullan, who is one of its two directors, and is also the CEO of Norby, is the applicant.

Disposition 29 For the above reasons, I am satisfied that Mullan should be granted leave to bring proceedings in the name of Norby against Trofimichine substantially in the form of the Proposed Pleading.

NORBY'S APPLICATION FOR AN INJUNCTION 30 Trofimichine, in his written and oral submissions opposed the interlocutory mandatory injunction which would require him to deliver up the Norby Software, Retained Prototypes and Norby Computer to Norby. 31 Norby contends that Trofimichine is preventing Norby from accessing its own source-code, which has the consequence that Norby cannot demonstrate the Norby Robot to potential investors and therefore cannot attract third-party investment which is essential if the Norby Robot is to be brought to market. 32 Norby, by the Proposed Pleading relies on two principal claims against Trofimichine. The first, in relation to the tort of detinue and the second, for breach of director or employee duties under s 181(1) and s 182(1) of the Act.

Intervener's submissions 33 Trofimichine submits that the claim for the return of the Norby Software, Retained Prototypes and the Norby Computer is misconceived. As noted above, Trofimichine submits that the Norby Software has always been, with Mullan's consent, in the custody and control of Trofimichine on behalf of Norby. Trofimichine submits that he remains a duly appointed director of Norby and as a consequence, the Norby Software, Retained Prototypes and the Norby Computer remain in Norby's possession such that there is no need for a mandatory injunction to compel delivery. Additionally, Trofimichine submits that the requests for the return of the property cannot be properly characterised as requests of Norby on the basis that Norby's solicitors (Merton Lawyers), from who the request came, could not be authorised to act on behalf of Norby by Mullan. 34 Trofimichine submits that for the same reasons Norby has not established a prima facie case that Trofimichine is in breach of his director or employee duties to Norby under s 181(1) or s 182(1) of the Act.

Serious question to be tried 35 Norby has established that there are serious questions to be tried. 36 I am satisfied on the evidence that a prima facie case has been established by Norby that Trofimichine has detained and wrongfully deprived Norby of access to the Norby Software, Retained Prototypes and the Norby Computer. I am satisfied that, on a prima facie review of the material, on 2 October 2023, Norby made a demand for the return of the Norby Software, Retained Prototypes and the Norby Computer and that Trofimichine has unreasonably refused to return them. 37 I am also satisfied on the evidence that Norby has established a prima-facie case that Trofimichine, by his conduct in detaining and wrongfully depriving Norby of access to the Norby Software, Retained Prototypes and the Norby Computer, and thereby depriving Norby of the benefit of the Norby Software, Retained Prototypes and the Norby Computer, has failed to discharge his duty to act in good faith in the best interests of Norby, and improperly used his position as a director of Norby causing detriment to the company.

Balance of convenience 38 I am satisfied in the circumstances, that the balance of convenience favours the grant of the interlocutory mandatory injunction sought by Norby as the failure to grant the interlocutory injunction will mean that Norby cannot demonstrate the Norby Robot to potential investors and, as a consequence, may be unable to attract third-party investment which is said to be critical to bringing the Norby Robot to market. I am satisfied that the failure to grant the injunction sought may result in Norby suffering irreparable damage. 39 I will require Norby to give the usual undertaking as to damages and also require that Mullan undertake to indemnify Norby in respect of this undertaking.

DISPOSITION 40 I will grant the interlocutory orders sought by Norby in its application and direct that Norby, after consultation with Trofimichine, provide a form of orders to give effect to these reasons. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Anderson.